Brazilian public banks: Short-term gain, long-term pain?
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Brazilian public banks: Short-term gain, long-term pain?

Dilma Rousseff has told Brazil’s public banks to boost the country’s flagging consumption until the elections with double-digit loan growth. Weakening credit quality and capital ratios are worrying analysts.

For a long time, it looked as if the trajectory of the slowing Brazilian economy would stay in positive territory until after presidential elections in October, which could see incumbent Dilma Rousseff re-elected. However, a quicker than expected deterioration in the economy and – not unconnected – Rousseff’s poll ratings have changed everything.

The death of the third party candidate, Eduardo Campos, has propelled a credible, nationally recognized contender, Marina Silva, into the campaign. Silva’s anti-establishment and leftist credentials are taking swathes of voters away from Rousseff, who looks certain to face the unpredictable fate of a run-off election.

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Brazilian president, Dilma Rousseff
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Economists are calling a technical recession for the first half of 2014: the first quarter’s GDP growth was revised down to -0.1% (from 0.2%) and expectations are that the second quarter will have seen a contraction of about 0.5%. Some of the second-quarter slowdown was caused by the loss of working days during the football World Cup; the consensus is for positive annual growth this year of about 0.6%.

But “this does not change the fact that the activity weakness has its roots in a faster-than-expected deterioration in sentiment”, writes Guilherme Loureiro, senior economist at UBS in Brazil.

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